Yorkshire Water: sustainability accounting

22 March 2019

Yorkshire Water has started thinking differently about its land by applying natural capital approaches as part of sustainability accounting, writes Hannah James

Managing interconnected and vital systems of water, land, people and infrastructure without degrading the natural environment is a complex task. Yorkshire Water knows that land is precious and is striving to find ways to unlock its value for society – all this in the face of the increasing challenges presented by climate change, a growing population and the imperative to keep bills affordable.

Financial accounting is an essential function for every organisation, ensuring that it has the necessary resources to continue operating. But as every landowner or manager knows, financial assets are not the only thing on which an organisation depends. Physical resources, such as clean water, raw materials and a skilled workforce, and non-physical resources such as brand reputation, customer satisfaction and people’s knowledge, are equally vital to its sustained existence. In recognition of these vital yet often undocumented resources, a new branch of accounting has emerged: sustainability accounting. Yorkshire Water is now working to embed such practices throughout the business, living up to its vision of ‘taking responsibility for the water environment for good’. At the heart of this process is the 6 capitals framework.

The 6 capitals

The term financial capital is used to describe the financial assets such as cash, shares and bonds held by an organisation or individual. In sustainability accounting, other forms of capital are recognised, however. The term can be used to refer to a stock of any physical or non-physical resource that yields flows of benefits for an individual, an organisation or society at large – including those often-forgotten, intangible yet vital natural resources. As economist Dieter Helm put it in the Guardian: ‘Natural capital is everything nature provides us for free. It is what our economy is built on. We add [artificial] capital in the shape of houses, factories, offices and physical infrastructure, and human capital with our skills, ideas and science’.

To account for its operations sustainably, Yorkshire Water has adopted the International Integrated Reporting Council’s framework of 6 capitals:

1. financial capital: the firm’s financial health and efficiency;
2. manufactured capital: pipes, treatment works, offices and IT;
3. natural capital: the materials and services from the environment on which we as a firm rely, especially water;
4. human capital: the capabilities and well-being of our workforce;
5. intellectual capital: our knowledge and processes; and
6. social capital: our relationships and customers’ trust in us.

Bold and ambitious strategies

Natural capital is often envisaged as the base on which the others are built, or as a system that encompasses them. This illustrates an important truth: directly or indirectly, we rely on the living world in everything we do. In developing sustainability accounting methods to inform our land strategy, we have therefore focused on natural capital accounting, often using it as the basis for assessments of the other types of capital. Our vision is to be more bold and ambitious in what we do with our land, thinking differently to find innovative ways to recognise and enhance its true value.

In 2016 Yorkshire Water piloted the then draft Natural Capital Protocol (NCP), working with AECOM and using the protocol to evaluate capacity building options at Rivelin water treatment works. This ex-post valuation confirmed that our chosen approach – a plant using traditional clarifiers, partially covered by a green roof – resulted in greater net benefits to nature and society than the default option of a dissolved air flotation and magnetic ion exchange plant.

Collecting the internal and external data required to value stocks and flows of natural capital was challenging, but in the end we were left with valuation evidence and methods on which we were able to draw for subsequent projects, and had a better understanding of how the NCP can guide natural capital assessments.

The next step was to apply the NCP to an ex-ante assessment of a land management opportunity, working with Arup to quantify the environmental and social costs and benefits of different development options for a sludge landfill site at Burnby Lane. This presented a new set of challenges and opportunities, including using natural capital assessment to evaluate a less constrained set of options and considering how to set spatial boundaries without disregarding geographical context.

Following the success of these 2 studies, we turned our attention to non-operational sites, investigating how the capitals approach could help us formulate a recreation strategy for the Little Don area in the Peak District, which includes the Langsett, Midhope and Underbank reservoirs and is a popular site for both local visitors and tourists. Yorkshire Water’s Little Don Recreation Plan aims to promote health, fitness and well-being by creating opportunities for outdoor recreation that is open to all. We worked with AECOM to create a model comparing options for the area.

The model values impacts on people’s health and well-being, job creation, the local economy and the natural environment, using a range of internal and external data sets such as the UK National Ecosystem Assessment and our own visitor surveys. With the focus on making outdoor recreation accessible to all, we used Natural England’s Monitor of Engagement with the Natural Environment to calculate the benefits of increasing time spent in nature, including detailed breakdowns by demographics to demonstrate the additional benefits of increasing the diversity of our visitors as well as overall numbers. The results are shown in Figure 1.

Figure 1. Net present values relative to baselines

In this context, the scenarios can be summarised as follows:

• inclusive environment: encouraging all groups to interact with the environment;
• active recreation: planting trees and encouraging sports such as mountain biking;
• active biodiversity: protecting and restoring nature, with limited visitor access;
• sustainable farming: working with farmers to better balance the needs of the environment; and
• sustainable forestry: planting the majority of the site with broadleaved woodland and hedgerows.

Embedding into strategy

Having created this capitals valuation model for Little Don, we are now working to embed it into decision-making processes for our land strategy. As part of our Beyond Nature programme, which aims to transform the way farms connect with the land, water and wildlife around them, we are carrying out a baseline natural capital assessment at Humberstone Bank farm in North Yorkshire.

This study presents an opportunity to develop the valuation model, building a spatial element into the process by integrating it with geographic information systems and refining how we quantify the impact of strategies that work with nature on service measures, such as raw water quality and flooding. This exercise will help us define our approach to valuing land, to monitor the impact of our plans to implement integrated catchment management during the regulatory asset management period 2020–25, and to fulfil our pledge to plant 1m trees in Yorkshire in the next 10 years.

We’ve also embedded the 6 capitals framework into our capital investment planning. Our decision-making framework, which we use to develop our 5- and 25-year business plans, contains a so-called capitals engine that optimises asset maintenance and development and other works in our budgets for environmental, human and social benefits. Currently in use for our 5-yearly water industry price review submission to Ofwat, the framework will also become part of our business as usual, helping us to make decisions for society and create the best value for our customers.

In October 2018, Yorkshire Water won the Embedding an Integrated Approach category of the Finance for the Future Awards; the Little Don model was also shortlisted in the Innovative Project category.

Measuring true value

The process of valuing natural, social and human capital flows in monetary terms can be resource-intensive and challenging, but it brings environment and society to the fore in decision-making, illuminating the scale of costs and benefits and revealing the nature and significance of trade-offs in a universally understood language. Yorkshire Water is not the only company to benefit from this approach: we were inspired by many others, including the International Integrated Reporting Council’s 6 capitals, the Crown Estate’s work on total impact, and the UK government’s 25-year environment plan, which puts natural capital front and centre and promises ‘gold standards in protecting and growing natural capital’.

The concept of putting a value on land and nature can seem counterintuitive: why try to impose a pound sign on values that run deeper than profit? However, as WWF’s executive director of advocacy and campaigns Tony Juniper puts it, ‘excluding nature from the mainstream economic discourse … perpetuates the battle that we have been losing for decades’. By giving nature its rightful place in decision-making, we’re expanding our definition of value to encompass what really matters.

Hannah James is lead sustainability adviser, Yorkshire Water

Further information

• Related competencies include: Management of the natural environment and landscape, Valuation
• Yorkshire Water: Sustainable accounting and the six capitals
• This feature is taken from the RICS Land journal (March/April 2019)
• Related categories: Land and resource management; Sustainability